More fuel for mortgage refinance boom: Home equity reaches record high

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Americans’ home equity reached a record high earlier this year, according to a new report by mortgage data firm Black Knight. That metric, along with record-low mortgage rates, sets the stage for a continued boom in mortgage refinancing.

Black Knight says “tappable home equity” — the equity homeowners could borrow against while maintaining a loan-to-value ratio of less than 80 percent — jumped to a record $6.5 trillion at the end of March.

“The environment is ripe for that surge of rate/term refinance lending to continue,” says Black Knight President Ben Graboske.

More than 90 percent of these equity-rich borrowers are “in the money” for a refi, meaning they have mortgage rates above current rates, Black Knight reports. The average rate on a 30-year fixed-rate mortgage fell to 3.35 percent last week, a record low, according to Bankrate’s national survey of lenders.

Black Knight says more than 75 percent of homeowners with mortgages have rates higher than 3.5 percent. Because of the closing costs that come with refinancing, you don’t want to refi every time rates fall a half point. “With rates currently near 3 percent, the amount they would save each monthly likely would outweigh the cost of the transaction,” the report stated.

But Black Knight reports that some homeowners still have mortgage rates above 5 percent — and those borrowers almost certainly would benefit from refinancing. If mortgage rates fall to 3 percent, Black Knight says, some 18.5 million American homeowners would be candidates for refis.

Cash-out refinances becoming less common

In boom times, record levels of home equity would open the possibility of using a refinance to extract cash from your home. However, with the coronavirus causing a dramatic drop in economic activity, lenders have been reluctant to sign off on cash-out refinances.

Black Knight’s report covers the January-March period, and the coronavirus pandemic didn’t hit the U.S. until the end of the quarter. Even so, the number of cash-out refinances, as well as the dollar value of equity withdrawn via refinance, fell for the first time since early 2019, Black Knight says. Cash-out refis accounted for 42 percent of refinance loans in the first quarter, about half the level seen in the fourth quarter of 2018.

What you can do if your mortgage rate is too high

Does it make sense to refi? Here’s how you can tell:

  • Take a look at your situation: Do you have significant equity in your home? Is your rate above 3.5 percent? Do you plan to be in your home for a few more years? If you can answer yes to all of these questions, a refi may make sense.
  • Crunch the numbers: Borrowers often forget about the hefty closing costs that accompany a refi. Your savings from the lower rate need to be significant enough to recover those upfront costs. Say you have a $200,000 loan at 3.75 percent. In that case, your monthly payment is $926. If you’re able to borrow $200,000 at 3.25 percent, your monthly payment would fall by $56, to $870 a month. If the refi means paying $4,000 in closing costs, you’d need nearly six years to make back your closing costs before the refi would provide a financial benefit. Bankrate’s refinance calculator can help you decide.
  • Shop around: Rates and closing costs can vary widely by lender. Make sure to compare offers from multiple lenders.
  • Keep in mind that market conditions are changing: Mortgage rates are difficult to predict, but many experts foresee rates falling below 3 percent in the next six months to a year. A plunge in rates would change the math — a 3.25 percent rate might not convince you, but a 2.75 percent rate probably would.

Featured image by Citizens of the Planet/Universal Images Group via Getty Images.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.